Good Time Company is a regional chain department store. It will remain in busine

Question

Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $188 million in a boom year and $79 million in a recession. The company's required debt payment at the end of the year is $113 million. The market value of the company’s outstanding debt is $86 million. The company pays no taxes.

What is the promised return on the company's debt?

What is the expected return on the company's debt?a.

What payoff do bondholders expect to receive in the event of a recession

Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $188 million in a boom year and $79 million in a recession. The company's required debt payment at the end of the year is $113 million. The market value of the company’s outstanding debt is $86 million. The company pays no taxes.

What is the promised return on the company's debt?

What is the expected return on the company's debt?a.

What payoff do bondholders expect to receive in the event of a recession

Explanation / Answer

What is promised retuen on companies debt = Required debt payment/ market value =113/86 -1 =31.40%

What payoff do bondholders expect to receive in the event of a recession

=0.6*113 + 0.4 *x y = 86

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